There is a lot of debate at the moment as to whether investors should be favouring growth or value. There’s a lot of talking heads telling us what the “pros” have been rotating in and out of, and what the indices have and haven’t done. There’s very little advice on what you should do.
For example:
* The Sunday Times reports today that Richard Buxton reported last summer that we could be at the start of a new 15-year bull cycle. (http://is.gd/t5k082)
* The Wall Street Journal reported on 3 April that “Value Stocks Head Higher as Growth Companies Look Pricey” (http://is.gd/0gh356)
* John Tobey at Forbes reported last month that “Ignore Momentum Advice
– Buy Real Growth Stocks” (http://is.gd/MeMWix). “The momentum stock sell-off does not mean we need to run from growth stocks. The best 2014 strategy is quite the opposite.”
* CNBC reported in late April “With the wipeout in growth stocks, many investors turned their attention to big-cap and value names, and the trend is expected to continue for months to come.” (http://www.cnbc.com/id/101599397)
* Ben Hobson on Stockopedia seems to favour quality income: “a slight softening in prices has re-opened the taps for good quality stocks offering forecast yields of more than 4%. For subscribers looking for income ideas now – perhaps with the new year’s ISA allocation in mind - this might be a good place to start.” (http://is.gd/OFhavh)
* Matthew Boesler at Business Insider reported in mid-April: “The stock market, but not momentum stocks, will likely recover during the next few months” (http://is.gd/ji83kD)
So, who’s right, if any?
Look at the 5-year chart showing the T1X (Techmark Index), LIX (Low Yield Index), and HIX (High Yield Index).
If we take T1X and LIX as proxies for growth shares, and the HIX as a proxy for value shares, then clearly growth has outstripped value. Under an assumption of mean value reversion, this would imply that
value should outperform in future.
A similar picture emerges is we look over 10 years:
However, if I draw a chart from near the end of December 1999, we see that growth has actually underperformed value:
Have I shown malice-aforethought in carefully choosing…
